A tale of two turnpikes

Several times a year, I make the drive from Chicago to my parents’ house in Youngstown, Ohio. It’s a 400-mile straight shot on the Indiana and Ohio Turnpikes – I-80/-I90 – and a key section of the nation’s interstate system.

And let me tell you, the Indiana Toll Road sucks, although anecdotal evidence would indicate that you are less likely to get a ticket In Indiana than in Ohio. The Ohio Turnpike has clean bathrooms and clean restaurants. The gift shops have things you might actually buy as gifts! Meanwhile, the rest stops on the Indiana Toll Road are just sad.

No surprise, the stop at Ohio’s mile post 20.8, closest to the Indiana border, is always crowded. Whether you are entering or leaving Ohio, it’s a great place to fill up the car, buy a snack and use a clean restroom. That’s especially true because gas at the first westbound stop in Indiana – Booth Tarkington, at mile post 146 in Fremont – sells for about $0.30 per gallon more than the last stop in Ohio and more that at stops further west in Indiana. Gouge much, Hoosiers?

They have to gouge, as they are losing money. The Indiana Toll Road filed for bankruptcy in September 2014. The concession is owned by Ferrovial, a Spanish company, and Macquarie Group, an Australian investment bank. In 2013, the Indiana Toll Road took in $158 million in earnings before interest, taxes and depreciation. That sounds nice, except that the company owed $193 million in debt service on the $3.2 billion it borrowed to cover the lease. Ferrovial and Macquarie have a plan to exit bankruptcy that involves selling the lease for its remaining term. We’ll see who wants to buy it and for how much.

Indiana sold a 75-year lease on its toll road for $3.8 billion in 2006, more than it was probably worth. In 2008, the City of Chicago sold a 75-year lease on its parking meters to an investor group for $1.2 billion, probably less than they were worth. In Ohio, Gov. John Kasich considered a privatization plan, but decided against it in 2010. One of the problems with privatization is that it is so new that there is not a competitive market to determine valuations. To make the cash value worthwhile, contracts tend to be set for long periods. Will we even be using cars that many years out?

Another problem is that state and municipal governments have a lot of experience operating roads and parking meters. What they don’t understand is how to manage large windfalls of cash effectively. In Indiana, the state took its $3.8 billion, paid off debt and invested in infrastructure projects. That sounds good, but now the money is gone, and the toll road won’t contribute to revenue again until 2081.

Ohio, meanwhile, will have steady and manageable cash flow. The Turnpike’s 2013 EBITDA of $166.9 million is comparable to the $158 million Indiana took in. The two turnpikes show a contrast between “good” privatization – having private companies compete to run the restaurants and gas stations – and “bad” privatization – turning the whole thing over to a company without much clear incentive to please customers. With 75-year leases, no one has to compete to keep either elected officials or citizens happy for a long time.

The private sector is often more efficient than the government, but some government inefficiency occurs because of the pursuit of something other than revenue. A toll road is a source of funds, but it is also a way to move people and goods from place to place, something that’s critical to a functioning economy. Likewise, parking meters are a source of revenue, but meter policies are also serve to ration scarce resources in a way that, ideally, balances the needs of merchants with the needs of residents.

Introducing competition and innovation to staid government programs can be a path toward getting the best of both worlds. But privatization initiatives must be carefully crafted to avoid tying together all the inefficiency of government with the “rational self interest” (aka, greed) of the market.